Brazilian Central Bank Inflation Report: prepare for landing

Brazil
The BCB’s Inflation Report (IR) for 4Q17 shows that the signaling of slower easing, leading to the end of the cycle in 1Q18, remains. The IR updates forecasts, as usual, showing inflation at 4.2% at the end of 2018 and 2019 in the active scenario, with interest rate and exchange rate forecasts in line with market expectations (according to the Focus report). In the hybrid scenario, with a constant exchange rate and the interest rate following market expectations, forecasts are at 4.1% for end-2018 and 4.0% for end-2019. These forecasts are consistent with a gradual end of the easing cycle in 1Q18. They are, in fact, consistent with the Selic steady at 6.75% or 6.5% until the end of 2018. The text confirms the signaling of the forecasts and recently released minutes, indicating that the next Copom decision is as yet firmly pointed at a 25-bp move, to 6.75%. We reckon the Copom will trim the Selic a bit further, to 6.5%, as we expect 1Q18 inflation to disappoint to the downside, bringing along inflationary expectations, and as recent activity data releases suggests rising downside risks to the recovery. ** Full Story here.
The mid-month consumer price index IPCA-15 climbed 0.35% in December, in line with our estimate and the median of market expectations. The index ended the year up by 2.94%, down substantially from 6.58% in 2016. Transportation (0.21 p.p.), housing (0.07 p.p.) and personal expenses (0.05 p.p.) provided the largest upward contributions. Fuels and airfares stood out in the transportation group. On the other hand, food, household items and communication posted negative changes. The underlying indicator for service inflation – which excludes tourism items, household services, courses and communication – advanced 0.37% during the month and 3.6% in 2017 (6.5% in 2016). Our preliminary forecast for the headline IPCA in December is around 0.30%. For the full year, we expect the IPCA to rise 2.80%, down from 6.29% last year. ** Full Story here.

The CMN cut the TJLP long term interest rate (BNDES benchmark lending) to 6.75% from 7.00%. It is worth noticing that the New Long Term Interest Rate (TLP) will only apply to new contracts and there will be a smooth transition before the new rate fully reflects market parameters. In this context, the TJLP will exist as long as there are outstanding loans granted at that rate, and its value will continue to be set every quarter by the National Monetary Council (CMN).

According to FGV’s industry survey preview, business confidence in the industrial sector (FGV) fell slightly (0.1% mom/sa) in December to 98.2. The result interrupts a sequence of five consecutive increases. The confidence breakdown shows expectations stable at 99.4 and the current situation component down 0.2% to 97.0. The preview of the capacity utilization (NUCI) rose 0.5 pp to 74.5; the index is 1.4 pp higher than one year ago. The final survey will be released on December 28.

Argentina

Argentina’s GDP expanded at faster pace in 3Q17. GDP grew 4.2% year-over-year, up from a revised 2.9% in 2Q17 (2.7% before). Growth was in line with the figure anticipated by the official monthly GDP proxy (EMAE). On a sequential basis, output increased by 0.9% adjusted for seasonality, following a revised 0.8% gain in the previous quarter (0.7% before). As a result, GDP grew 2.5% in the first nine months of the year relative to the same period of 2016. Domestic demand (excluding inventories) grew a solid 5.7%, up from 4.4% in 2Q17 and led by a 13.9% increase in gross investment (7.7% in the previous quarter). The solid growth in internal demand and the strengthening of the Peso led to a stronger expansion of imports of goods and services (18.7%, significantly higher than the 9.1% gain registered in 2Q17). Exports increased by a modest 2.1%, after posting two consecutive declines (-1.2% each) in the previous quarters.

Growth is broad based across sectors and led by construction activity, financial intermediation and manufacturing. Construction is the most dynamic sector increasing 12.8% year over year in 3Q17 (up from 9.7% in the previous quarter) helped by public investment. Financial intermediation also accelerated to 6.8% from 4.3% in 2Q17. Manufacturing posted a solid 4.1% annual gain in the quarter from 2.8% before. We forecast 2.9% growth this year and 3.5% in 2018. Following the outcome of the mid-term elections, sentiment has improved markedly providing support to the recovery. ** Full Story here.

As expected, fiscal accounts deteriorated in November, without compromising the official target for the year. The primary deficit was at ARS 29.7 billion, up from the ARS 13.3 billion deficit registered in November 2016. The primary deficit accumulated over 12 months rose to ARS 343 billion in November, approximately 3.6% of GDP (3.4% in October). Total revenues rose by 18.4% year over year in November 2017, down from 31.8% in October. Excluding the base effect of the tax amnesty penalties collected in November 2016, total revenues grew 29.2% year over year (+5.6% in real terms). Total revenues rose by 18.4% year over year in November 2017, down from 31.8% in October. Excluding the base effect of the tax amnesty penalties collected in November 2016, total revenues grew 29.2% year over year (+5.6% in real terms).

We expect the primary deficit to deteriorate again in December compared with one year ago due to the absence of tax penalties. We expect the government to run a primary deficit of 4.0% of GDP this year, which is 0.2% below the official target. We also expect the government to meet its fiscal target in 2018. The treasury will continue slashing subsidies, and the expected savings due to the recent passage of the pension reform law will help the government meet the primary fiscal deficit of 3.2% of GDP next year, despite the lack of extraordinary revenues.
** Full Story here.

Mexico

Mexico’s CPI came in above market expectations once again in the first half of December. Consumer price index rose 0.44% (bbg: 0.39%) relative to the second half of November, while core prices were up by 0.43% (bbg: 0.36%). Air fares jumped 41% (contributing with 10-bps for total inflation), which is high even considering seasonality. Tourism packages also gave a meaningful contribution for inflation, although in this case the increase (12.4%) is not so far from its historical pattern for the period of the year. Besides, gasoline prices and non-processed food were also important inflation drivers. As a result, annual inflation stood broadly stable at a high level. Headline inflation reached 6.69% year over year, only slightly up from the 6.67% previously. Core inflation fell to 4.9% (from 4.95%). Non-core inflation increased to 12.2% (from 11.97%) pressured both by non-processed food items and administered prices. While inflation has been surprising to the upside, we note that at the margin inflation is far lower than year-over-year readings. So in January a substantial decline of annual inflation will likely come, though the recent figures suggest that meeting the 3% target next year is becoming more challenging.

The IGAE (monthly proxy for GDP) gained a weak 1.5% year over year, but marked an improvement from the 0.5% gain the previous month. At the margin, activity gained a modest 0.13%, after a 0.6% contraction. So the economy is yet to fully recover from the natural disasters that hit the country by the end of 3Q17. We expect Mexico’s economic growth to return to levels around 2%, as manufacturing exports recover and the labor market supports consumption, offsetting weak investment (affected by uncertainties over trade relations to the U.S. and – to a lesser extent – fiscal consolidation).

INEGI will announce November’s unemployment rate tomorrow at 10:00 AM (SP time). We and the Bloomberg market consensus expect the unemployment rate to post 3.3% (below the 3.5% rate recorded in the same month of last year) given that labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment grew at a robust pace in November (4.3% year-over-year, from 4.4% in October).

Colombia

Low business confidence in November solidifies concerns over the state of activity and favors the likely continuation of the easing cycle early next year. According to think-tank Fedesarrollo, industrial confidence came in at -10.1% in (0 is neutral), below the -4.0% recorded one year earlier, the lowest November level since 2008. Of the three components of industrial confidence, the volume of goods ordered deteriorated, inventories ticked up (negative), while the expectation for the next quarter fell into pessimistic territory. However, once adjusted for seasonality, industrial confidence managed to gain 2.4 percentage points from October led by an improvement in volume of goods ordered. On the other hand, retail confidence remains in optimistic territory, but continues to stay at low levels. Retail confidence in November was 18.6%, down 4.0 percentage points over twelve-months, the lowest November level since 2013. The decline over the last 12-months is once more due to the evaluation of current performance. Looking ahead, higher real wages (as inflation falls) and lower interest rates, along with a favorable external environment, will likely aid an activity recovery and a confidence improvement. We see economic growth of 1.6% this year (2.0% in 2016), with a pickup to 2.5% growth next year.

LatAm Macro Calendar

Trade Update

Take profits on short local rates receiver in Colombia. On September 12th we recommended to receive Colombian 18-month IBR rate, as we expected Banrep to cut more than the market was expecting at that time (see here). The trade has earned a solid 64bps carry-adjusted profit. Banrep has cut the policy rate by 25bps twice since we entered the trade and now the curve prices in additional 60bps in cuts over the next 6 months. This would bring the policy rate to a level slightly higher than 4.0% over the next 6 months (from 4.75% today). We believe the yield curve pricing is now fair, and therefore we are taking profits on the trade. Although economic activity remains weak and inflation is expected to fall next year, we don’t see big chances of Banrep cutting the policy rate below 4.0%, especially in an environment of tightening global financial conditions, and Colombia with some risk of losing its investment grade.

Fuente: ITAU

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